UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 23, 2020

HERITAGE COMMERCE CORP

(Exact name of registrant as specified in its charter)

California

000-23877

77-0469558

(State or other jurisdiction of
incorporation)

(Commission File Number)

(IRS Employer Identification No.)

150 Almaden Boulevard, San Jose, California

95113

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (408) 947-6900

Not Applicable

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (See General Instruction A.2. below):

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

  

Trading Symbol(s)

  

Name of each exchange on which registered

Common Stock, No Par Value

  

HTBK

  

The Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the

Exchange Act


ITEM 2.02RESULTS OF OPERATIONS AND FINANCIAL CONDITION

On July 23, 2020, Heritage Commerce Corp, the holding company (the “Company”) of Heritage Bank of Commerce (the “Bank”) issued a press release announcing preliminary unaudited results for the second quarter and six months ended June 30, 2020. A copy of the press release is attached as Exhibit 99.1 to this Current Report and is incorporated herein by reference.

The information in this report set forth under this Item 2.02 shall not be treated as “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933 or the Securities Act of 1934, except as expressly stated by specific reference in such filing.

ITEM 8.01OTHER EVENTS

QUARTERLY DIVIDEND

On July 23, 2020, the Company announced that its Board of Directors declared a $0.13 per share quarterly cash dividend to holders of common stock. The dividend will be paid on August 20, 2020, to shareholders of record on August 6, 2020. A copy of the press release is attached as Exhibit 99.2 to this Current Report and is incorporated herein by reference.

ITEM 9.01FINANCIAL STATEMENTS AND EXHIBITS

(D) Exhibits.

99.1

Press Release, dated July 23, 2020, entitled “Heritage Commerce Corp Reports Earnings of $10.6 Million for the Second Quarter of 2020”

99.2

Press Release, dated July 23, 2020, entitled “Heritage Commerce Corp Declares Quarterly Cash Dividend of $0.13 Per Share”

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: July 23, 2020

Heritage Commerce Corp

By: /s/ Lawrence D. McGovern

Name: Lawrence D. McGovern

Executive Vice President and Chief Financial Officer

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Exhibit 99.1

Heritage Commerce Corp Reports Earnings of $10.6 Million for the Second Quarter of 2020

San Jose, CA — July 23, 2020 — Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced second quarter 2020 net income of $10.6 million, or $0.18 per average diluted common share, compared to $11.4 million, or $0.26 per average diluted common share, for the second quarter of 2019, and $1.9 million, or $0.03 per average diluted common share, for the first quarter of 2020. For the six months ended June 30, 2020, net income was $12.5 million, or $0.21 per average diluted common share, compared to $23.5 million, or $0.54 per average diluted common share, for the six months ended June 30, 2019. All results are unaudited.

“Our results improved in the second quarter of 2020; however, the ongoing impact of the Coronavirus pandemic continues to weigh heavily on our communities and market,” said Keith A. Wilton, President and Chief Executive Officer. “We benefitted from a 5% sequential quarter growth in loan balances during the second quarter of 2020, which primarily resulted from the addition of $324.6 million in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans that funded during the quarter. These loans are fully guaranteed by the SBA. In addition, total deposits increased 16% in the second quarter of 2020 from the first quarter 2020 as a result of $533.6 million growth in deposits, primarily tied to deposits from customers that took out PPP loans. As expected, our net interest margin came under pressure from two Federal Reserve rate cuts in March of this year, but also from lower yields on newly funded PPP loans. Credit quality improved on a sequential quarter basis, as nonperforming assets (“NPAs”) declined ($3.0) million, or (25%) at June 30, 2020 to $9.1 million, from $12.1 million at March 31, 2020, and classified assets decreased to $31.5 million from $39.6 million.”

“Notwithstanding the ongoing impact of the pandemic, we believe that our healthy capital and liquidity positions, strong earnings power, and conservative credit culture will serve us well through these challenging times,” said Mr. Wilton. “I also would like to thank our employees across the Company for their ongoing hard work and dedication to our customers.”

Coronavirus (COVID-19) Weighs on Local Communities and Our Economy

In mid-March, public health departments in the six largest counties in the San Francisco Bay Area, which account for most of the bank’s market footprint, imposed strict “Shelter-in-Place” orders for all residents. A few days later, the State of California issued a similar statewide order. Bay Area Counties and the state extended these orders through April, before easing restrictions in May and June. Following a resurgence in cases, on June 19, 2020, the state announced new health guidelines requiring the use of face coverings when in public or common spaces. On July 13, 2020, California expanded statewide indoor closures for businesses, encouraged the wearing of face masks and discouraged the gathering of individuals beyond immediate households. The Company has closely monitored the toll from the pandemic, including its economic impact. While the local response to COVID-19 appeared to have initially helped limit its spread, case numbers are once again increasing and the overall impact on our local economy may not be fully known. Since February, new jobless claims in California, through the week of July 11, totaled over 8.2 million, while the state has lost a net 2.6 million jobs (14.0%). In the seven Bay Area counties we serve, 423,000 jobs (11.8%) have been lost. The State’s unemployment rate at the end of June stood at 15.1%, up from 5.3% at the end of March, while the unemployment rate in the seven Bay Area counties we serve increased to 12.0% from 3.4%.

At the end of March, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which included $349 billion in funding for the SBA PPP Loan Program. By mid-April, the Bank had processed 597 PPP loan applications with potential outstanding balances of $225.3 million. On April 23, 2020, Congress passed separate economic stimulus legislation, which provided an additional $310 billion in funding for the PPP Loan Program that the Company was also able to utilize to further support our small business clients. In all, the Bank processed a total of 1,105 PPP loan applications, with total principal balances of $333.4 million. PPP loan pay offs totaled $8.8 million during the second quarter of 2020, and the Company ended the quarter with $324.6 million in outstanding PPP loan balances. These generated $582,000 in interest income and $722,000 in deferred fees, which was partially offset by ($54,000) in deferred costs expensed during the quarter. At June 30, 2020, total loans included deferred fees on PPP loans of $10.4 million and deferred costs of $1.2 million. PPP borrowers who can demonstrate that the funding received has been used for certain purposes such as to cover payroll and rent costs and meet certain other requirements, can qualify for partial or full federal relief on loan principal and interest. At present, the qualifying process for PPP borrowers to receive approval for loan forgiveness has yet to be finalized by the SBA. Nonqualifying borrowers or borrowers who have not applied for forgiveness, who received loans under the CARES Act, are contractually obligated to begin making monthly repayments on principal and interest six months after their loans have funded.

Also in March 2020, in conjunction with the passage of the CARES Act, federal bank regulators announced new accounting guidance for loan modifications by banks, which is intended to provide temporary credit accommodation through loan payment deferrals for

1


customers whose businesses have experienced economic hardship due to the impact of the Coronavirus. The guidance also allows for the temporary suspension of requirements for such loans to be classified as troubled debt restructurings ("TDR") for accounting purposes. In response to customers’ needs, the Company made accommodations for initial payment deferrals of up to 90 days, generally, with the potential, upon application, for up to an additional 90 days of payment deferral (180 days maximum). The Company also waived all normal applicable fees. The following table shows the deferments at June 30, 2020 by category:

DEFERMENTS BY CATEGORY

    

(in $000’s, unaudited)

Pass and Watch

$

31,369

Special Mention

145,930

Classified

5,563

Total

$

182,862

Through June 30, 2020, the Company had approved 235 initial requests for payment deferrals on loans with balances totaling approximately $183 million, or 7%, of our loan portfolio. The Bank has elected to initially downgrade the risk grades of these loans to “Special Mention” status. At the end of the second quarter of 2020, the pool of deferred loans in our portfolio were mostly tied to business borrowers from a broad range of industries and included $34 million in loan deferments to the healthcare industry (mostly dentists) and $23 million in loan deferments to the accommodation and food services industries (mostly hotels and restaurants). Of the $183 million in deferred loans, 71% are supported by some form of real estate. Commercial real estate (“CRE”) deferments of $113 million included $75 million of investor CRE and $38 million of owner-occupied CRE. Deferred loans secured by CRE had an average loan-to-value (“LTV”) ratio of 41% at the end of the second quarter of 2020. The majority of deferred loans are also supported by personal guarantees. Between July 1 to July 15, 2020, $32 million in deferred loans returned to regular payment status and have been upgraded from Special Mention status. In addition to these previously mentioned deferred loans, we have purchased participations in a micro loan portfolio that had $3.3 million in deferments as of the end of the second quarter of 2020.

The Bank had a portfolio of SBA 7(a) loans totaling $48.6 million, or 1.8% of its total loans, as of the end of the second quarter of 2020. As part of the SBA’s Coronavirus debt relief efforts, beginning in the April 2020, the SBA commenced a six-month program to cover payments of principal, interest and any associated fees for these borrowers.

In regard to our new lease agreement for 54,910 square feet of office space in San Jose, California, which was entered into in 2019 and commenced on February 1, 2020, with recent easing of California’s and Santa Clara County’s Coronavirus related Shelter-in-Place restrictions, the Company now anticipates completing the move of its main office and San Jose branch to this new location by the end of the third quarter of 2020.

Credit Quality and Performance

At June 30, 2020, NPAs decreased by ($7.9) million, or 46%, to $9.1 million, compared to $17.0 million at the end of the second quarter of 2019, and decreased by ($3.0) million, or 25% from $12.1 million at the end of the first quarter of 2020. Classified assets increased to $31.5 million, or 0.68% of total assets, at June 30, 2020, compared to $31.2 million, or 1.00% of total assets, at June 30, 2019, and decreased from $39.6 million, or 0.97% of total assets, at March 31, 2020. The linked quarter decrease in classified assets for the second quarter of 2020, compared to the first quarter of 2020, resulted from multiple loan payoffs and paydowns that were partially offset by loan downgrades. Classified deferments totaled $5.6 million at the end of the second quarter of 2020. Special Mention loans increased to $164 million, or by $115 million, in the second quarter of 2020, compared to $49 million in the first quarter of 2020. Special Mention included $146 million in deferments and $18 million in other Special Mention loans at June 30, 2020, compared to $24 million in deferments and $25 million in other Special Mention loans at March 31, 2020. As previously noted, the Bank has opted to initially grade loan deferments as Special Mention and these grades will remain until loan payment performance resumes and/or information gained is sufficient to warrant a grade change. Also as mentioned above, between July 1 to July 15, 2020, $32 million in deferred loans had returned to regular payment status and have been upgraded from Special Mention status. Exclusive of deferred loans at June 30, 2020, the $7 million decrease in other Special Mention loans from the linked quarter resulted from movement of numerous loans between grades with upgrade totals outweighing downgrades totals, some of which included loans that had been provided a deferment and have since been upgraded. Notably, many of our borrowers paid down their operating lines of credit during the second quarter of 2020. Consequently, the line utilization rate on commercial lines of credit declined to 27% at the end of the second quarter from 36% at the end of the first quarter of 2020 and 40% at the end of the second quarter of 2019.

The provision for credit losses on loans was $1.1 million for the second quarter of 2020, compared to a credit to the provision for loan losses of ($740,000) for the second quarter of 2019, and a provision for credit losses on loans of $13.3 million for the first quarter of 2020. The provision for credit losses on loans was $14.4 million for the six months ended June 30, 2020, compared to a ($1.8) million credit to the provision for loan losses for the six months ended June 30, 2019. At June 30, 2020, the allowance for credit losses on loans (“ACLL”) was $45.4 million, representing 1.69% of total loans, and 498.0% of nonperforming loans. The allowance for loan losses (“ALLL”) was $26.6 million at June 30, 2019, representing 1.42% of total loans and 156.5%, of nonperforming loans. The

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ACLL was $44.7 million at March 31, 2020, representing 1.75% of total loans, and 369.8% of nonperforming loans. The six basis points linked-quarter decline of the ACLL to total loans was largely due to the 5% increase in total loans for the second quarter of 2020, which primarily resulted from $324.6 million in new PPP loans with 100% SBA guarantees that do not require reserves. The pro forma ACLL to loans excluding PPP loans was 1.92% at June 30, 2020. The increase in the provision for credit losses on loans for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, was driven primarily by the deteriorating economic outlook resulting from the Coronavirus pandemic.

The Company continues to monitor portfolio loans made to commercial customers with businesses in higher risk sectors as defined by the Company. The following table provides a breakdown of such loans as a percentage of total loans at June 30, 2020 and March 31, 2020:

% of Total

% of Total

Loans at

Loans at

HIGHER RISK SECTORS

    

June 30, 2020

    

    

March 31, 2020

    

Health care and social assistance:

Offices of dentists

1.79

%  

1.63

%  

Offices of physicians (except mental health specialists)

0.76

%  

0.70

%  

Other community housing services

0.27

%  

0.11

%  

All others

2.21

%  

1.84

%  

Total health care and social assistance

5.03

%  

4.28

%  

Retail trade:

Gasoline stations with convenience stores

1.90

%  

1.98

%  

All others

2.44

%  

2.18

%  

Total retail trade

4.34

%  

4.16

%  

Accommodation and food services:

Full-service restaurants

1.38

%  

0.86

%  

Limited-service restaurants

0.79

%  

0.63

%  

Hotels (except casino hotels) and motels

0.89

%  

0.94

%  

All others

0.70

%  

0.52

%  

Total accommodation and food services

3.76

%  

2.95

%  

Educational services:

Elementary and secondary schools

0.65

%  

0.15

%  

Education support services

0.40

%  

0.15

%  

All others

0.24

%  

0.17

%  

Total educational services

1.29

%  

0.47

%  

Arts, entertainment, and recreation

1.26

%  

1.09

%  

Purchased participations in micro loan portfolio

0.80

%  

0.95

%  

Total higher risk sectors

16.48

%  

13.90

%  

During the second quarter, the Company added education-related loans to those it had previously identified as at higher risk of credit loss. During the quarter, the percentage of loans to higher risk sectors increased linked quarter to 16.5% from 13.9% as a result of $91 million, or 3.4%, in new SBA PPP loan fundings to commercial clients in higher risk sectors.

“In our initial response to the challenges posed by the Coronavirus pandemic last quarter, we implemented extensive business resumption plans, procedures and redundant systems which enabled 75% of our employees to work remotely, but still have access to the resources needed to fully assist our clients with their banking needs,” added Mr. Wilton. “We cannot fully express our pride and gratitude for the efforts and accomplishments of our employees this quarter. The effort and resolve shown by our banking and credit teams was critical in enabling so many of our customers to address their banking needs and access PPP loan fundings. In addition, our branch teams have been thorough and meticulous in implementing the public safety protocols required to safely meet the needs of visiting customers. All branches remain open to serve our customers and communities in accordance with the Coronavirus safety guidance provided by the Centers for Disease Control and Prevention (“CDC”) and the California Department of Public Health (“CDPH”).”

Capital and Liquidity

“Our regulatory capital position serves as the foundation of our bank’s financial condition and the basis of security for our banking customers. At June 30, 2020, the regulatory capital positions of both the Company and Bank remained healthy,” stated Mr. Wilton. “Our Total Risk-Based capital ratio and Leverage ratio for the Company was 15.9% and 9.4%, respectively, and 15.1% and 9.8%, respectively, for the Bank.”

Our liquidity position refers to our ability to maintain cash flows sufficient to fund operations, to meet all of our obligations and commitments, and unexpected sudden changes in levels of its loans and deposits in a timely manner. At June 30, 2020, the Company had a strong liquidity position with $925.9 million in cash and cash equivalents, and approximately $664.7 million in available borrowing capacity from sources including the Federal Home Loan Bank (“FHLB”), the Federal Reserve Bank of San Francisco

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(“FRB”), Federal funds facilities with several financial institutions, and a line of credit with a correspondent bank. The Company also had $610.6 million (at fair market value) in unpledged securities available at June 30, 2020. Our loan to deposit ratio decreased to 68.88% at June 30, 2020, compared to 71.60% at June 30, 2019, and 75.86% at March 31, 2020. Mr. Wilton remarked in closing, “We believe that our robust capital base, historically elevated liquidity position, diversified loan portfolio, and reserve for credit losses positions us to react quickly and decisively in addressing challenges related to the economic impact of the Coronavirus pandemic that may arise in future quarters.”

Second Quarter 2020 Highlights (as of, or for the periods ended June 30, 2020, compared to June 30, 2019, and March 31, 2020, except as noted):

Operating Results:

Diluted earnings per share were $0.18 for the second quarter of 2020, compared to $0.26 for the second quarter of 2019, and $0.03 for the first quarter of 2020. Diluted earnings per share were $0.21 for the first six months of 2020, compared to $0.54 for the six months of 2019.

The following table indicates the ratios for the return on average tangible assets and the return on average tangible equity for the periods indicated:

For the Quarter Ended

 

For the Six Months Ended

    

June 30, 

    

March 31, 

    

June 30, 

 

June 30, 

    

June 30, 

2020

2020

2019

 

2020

2019

Return on average tangible assets

1.01%

0.19%

1.53%

0.62%

1.58%

Return on average tangible equity

11.06%

1.91%

15.94%

6.45%

16.89%

Net interest income, before provision for credit losses on loans, increased 13% to $34.9 million for the second quarter of 2020, compared to $30.9 million for the second quarter of 2019, primarily due to an increase in the average balance of loans due to the Presidio Bank (“Presidio”) merger, additional interest and fee income from PPP loans, and an increase in the accretion of the loan discount into loan interest income from our merger with Presidio during the fourth quarter of 2019, partially offset by decreases in the prime interest rate and decreases in the yield on investment securities and overnight funds. Net interest income for the second quarter of 2020 decreased (9%) from $38.6 million for the first quarter of 2020, primarily due to decreases in the prime rate and declines in the yields on investment securities and overnight funds, partially offset by additional interest and fee income from PPP loans. Net interest income increased 19% to $73.5 million for the first six months of 2020, compared to $62.0 million for the first six months of 2019, primarily due to an increase in the average balance of loans due to the Presidio merger, additional interest and fee income from PPP loans, and an increase in the accretion of the loan discount into loan interest income from our merger with Presidio, partially offset by decreases in the prime rate, and decreases in the yield on investment securities and overnight funds.

The fully tax equivalent (“FTE”) net interest margin contracted 92 basis points to 3.46% for the second quarter of 2020, from 4.38% for the second quarter of 2019, primarily due to a decline in the average yield of loans, investment securities, and overnight funds, partially offset by an increase in the average balance of loans, additional interest and fee income from PPP loans, and an increase in the accretion of the loan discount into loan interest income from our merger with Presidio. The FTE net interest margin contracted 79 basis points for the second quarter of 2020 from 4.25% for the first quarter of 2020, primarily due to a decline in the average yield on loans, investment securities, and overnight funds, and a decrease in the accretion of the loan discount into loan interest income from our merger with Presidio, partially offset by additional interest and fee income from PPP loans.

For the first six months of 2020, the FTE net interest margin contracted 55 basis points to 3.83%, compared to 4.38% for the first six months of 2019, primarily due to the impact of decreases in the yields on loans, investment securities, and overnight funds, partially offset by an increase in the average balance of loans, additional interest and fee income from PPP loans, and an increase in the accretion of the loan discount into loan interest income from our merger with Presidio.

The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:

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The average yield on the total loan portfolio decreased to 4.92% for the second quarter of 2020, compared to 5.96% for the second quarter of 2019, primarily due to a decline in the average yield on loans and new average balances of lower yielding PPP loans, partially offset by an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.

For the Quarter Ended

For the Quarter Ended

 

June 30, 2020

June 30, 2019

 

Average

Interest

Average

Average

Interest

Average

 

(in $000’s, unaudited)

Balance

Income

Yield

Balance

Income

Yield

 

Loans, core bank and asset-based lending

$

2,369,004

$

27,694

 

4.70

%  

$

1,727,988

$

23,342

 

5.42

%  

SBA PPP loans

231,251

582

 

1.01

%  

 

 

PPP fees, net

637

 

1.11

%  

 

 

Bay View Funding factored receivables

 

44,574

2,562

 

23.12

%  

 

45,708

2,967

 

26.04

%  

Residential mortgages

 

31,219

197

 

2.54

%  

 

36,136

234

 

2.60

%  

Purchased CRE loans

25,542

210

3.31

%  

31,484

290

3.69

%  

Loan fair value mark / accretion

 

(14,497)

963

 

0.16

%  

 

(5,842)

418

 

0.10

%  

Total loans

$

2,687,093

$

32,845

 

4.92

%  

$

1,835,474

$

27,251

 

5.96

%  

The average yield on the total loan portfolio decreased to 4.92% for the second quarter of 2020 compared to 5.57% for the first quarter of 2020, primarily due to decreases in the prime rate on loans, new average balances of lower yielding PPP loans, and a decrease in the accretion of the loan purchase discount into loan interest income from the acquisitions.

For the Quarter Ended

For the Quarter Ended

 

June 30, 2020

March 31, 2020

 

Average

Interest

Average

Average

Interest

Average

 

(in $000’s, unaudited)

Balance

Income

Yield

Balance

Income

Yield

 

Loans, core bank and asset-based lending

$

2,369,004

$

27,694

 

4.70

%  

$

2,422,020

$

30,104

 

5.00

%  

SBA PPP loans

231,251

 

582

 

1.01

%  

PPP fees, net

 

637

 

1.11

%  

Bay View Funding factored receivables

 

44,574

 

2,562

 

23.12

%  

 

47,470

2,877

 

24.38

%  

Residential mortgages

 

31,219

 

197

 

2.54

%  

 

33,075

230

 

2.80

%  

Purchased CRE loans

25,542

210

3.31

%  

27,340

249

3.66

%  

Loan fair value mark / accretion

 

(14,497)

 

963

 

0.16

%  

 

(16,180)

1,322

 

0.22

%  

Total loans

$

2,687,093

$

32,845

 

4.92

%  

$

2,513,725

$

34,782

 

5.57

%  

The average yield on the total loan portfolio decreased to 5.23% for the six month ended June 30, 2020 compared to 5.94% for the six months ended June 30, 2019, primarily due to decreases in the prime rate on loans and new average balances of lower yielding PPP loans, partially offset an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.

For the Six Months Ended

For the Six Months Ended

 

June 30, 2020

June 30, 2019

 

Average

Interest

Average

Average

Interest

Average

 

(in $000’s, unaudited)

Balance

Income

Yield

Balance

Income

Yield

 

Loans, core bank and asset-based lending

$

2,395,469

$

57,798

 

4.85

%  

$

1,726,364

$

46,195

 

5.40

%

SBA PPP loans

115,669

 

582

 

1.01

%  

PPP fees, net

 

637

 

1.11

%  

Bay View Funding factored receivables

 

46,022

 

5,439

 

23.77

%  

 

47,097

 

5,921

 

25.35

%

Residential mortgages

 

32,147

 

427

 

2.67

%  

 

36,451

 

485

 

2.68

%

Purchased CRE loans

26,441

459

3.49

%  

32,409

584

3.63

%  

Loan fair value mark / accretion

 

(15,339)

 

2,285

 

0.19

%  

 

(6,044)

 

873

 

0.10

%

Total loans

$

2,600,409

$

67,627

 

5.23

%  

$

1,836,277

$

54,058

 

5.94

%

The total net purchase discount on loans from the Focus Business Bank loan portfolio was $5.4 million on the acquisition date of August 20, 2015, of which $366,000 remains outstanding as of June 30, 2020. The total net purchase discount on loans from the Tri-Valley Bank loan portfolio was $2.6 million on the acquisition date of April 6, 2018, of which $1.2 million remains outstanding as of June 30, 2020. The total net purchase discount on loans from the United American Bank loan portfolio was $4.7 million on the acquisition date of May 4, 2018, of which $2.3 million remains outstanding as of June 30, 2020. The total net purchase discount on loans from the Presidio loan portfolio was $12.5 million on the Presidio merger

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date of October 11, 2019 (the “merger date”), of which $10.1 million remains outstanding as of June 30, 2020. In aggregate, the remaining net purchase discount on total loans acquired was $14.0 million at June 30, 2020.

The average cost of total deposits was 0.17% for the second of 2020, compared to 0.31% for the second quarter of 2019 and 0.22% for the first quarter of 2020. The average cost of total deposits was 0.19% for the six months ended June 30, 2020, compared to 0.30% for the six months ended June 30, 2019.

There was a $1.1 million provision for credit losses on loans for the second quarter of 2020, compared to a credit to the provision for loan losses of ($740,000) for the second quarter of 2019, and a $13.3 million provision for credit losses on loans for the first quarter of 2020. There was a $14.4 million provision for credit losses on loans for the six months ended June 30, 2020, compared to a ($1.8) million credit to the provision for loan losses for the six months ended June 30, 2019.

The increase in the provision for credit losses on loans for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, was driven primarily by a significantly deteriorated economic outlook resulting from the Coronavirus pandemic. Most major economic forecasts, including the California Economic Forecast (“CEF”) show a significant decline in California GDP and a substantial rise in unemployment for 2020. At January 1, 2020, the forecast for California GDP for 2020 was an annual increase in the low single digits and the forecasted California unemployment rate for 2020 was in the mid-single digits. In June 2020, the CEF forecast was revised for GDP in the negative low single digits and peak unemployment in the low double digits. The three loan classes where the largest increases in reserves were recorded under the CECL loss rate methodology were investor-owned commercial real estate (“CRE”), construction & land, and commercial and industrial (“C&I”). Ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, portfolio duration, and other factors.

Total noninterest income decreased to $2.1 million for the second quarter of 2020, compared to $2.8 million for the second quarter of 2019, primarily due to lower service charges and fees on deposit accounts, and lower gains on sales of securities. Total noninterest income decreased for the second quarter of 2020 from $3.2 million for the first quarter of 2020, primarily due to a $791,000 gain on the disposition of foreclosed assets during the first quarter of 2020, and lower service charges and fees on deposit accounts during the second quarter of 2020.

For the six months ended June 30, 2020, total noninterest income increased to $5.3 million, compared to $5.2 million for the six months ended June 30, 2019, primarily as a result of a gain on disposition of foreclosed assets, partially offset by lower service charges and fees on loans during the six months ended June 30, 2020.

Total noninterest expense for the second quarter of 2020 increased to $21.0 million, compared to $18.4 million for the second quarter of 2019, primarily due to additional employees and operating costs added as a result of the Presidio merger, and higher salaries and employee benefits as a result of annual salary increases. Total noninterest expense for the second quarter of 2020 declined by ($4.8) million from $25.8 million for the first quarter of 2020, due to reduced merger-related costs for the Presidio merger compared to the first quarter of 2020, higher than usual deferred cost resulting from the PPP loans, and the impact of cost savings for the full second quarter of 2020 following the Presidio systems conversion during the first quarter of 2020.

Noninterest expense for the six months ended June 30, 2020 increased to $46.8 million, compared to $36.4 million for the six months ended June 30, 2019, primarily due to higher salaries and employee benefits as a result of annual salary increases, and additional employees and operating costs added as a result of the Presidio merger.

Earnings were reduced by pre-tax merger-related costs related to the merger with Presidio for the periods indicated as follows:

For the Quarter Ended

 

For the Six Months Ended

MERGER-RELATED COSTS

    

June 30, 

    

March 31, 

    

June 30, 

 

June 30, 

    

June 30, 

(in $000’s, unaudited)

2020

2020

2019

 

2020

2019

Salaries and employee benefits

$

$

356

$

$

356

$

Other

59

2,068

540

2,127

540

Total merger-related costs

$

59

$

2,424

$

540

$

2,483

$

540

Full time equivalent employees were 340 at June 30, 2020, 309 at June 30, 2019, and 337 at March 31, 2020.

6


The efficiency ratio was 56.76% for the second quarter of 2020, compared to 54.76% for the second quarter of 2019, and 61.70% for the first quarter of 2020. The efficiency ratio for the six months ended June 30, 2020 was 59.38%, compared to 54.12% for the six months ended June 30, 2019.

Income tax expense was $4.3 million for the second quarter of 2020, compared to $4.6 million for the second quarter of 2019, and $868,000 for the first quarter of 2020. The effective tax rate for the second quarter of 2020 was 28.7%, compared to 28.9% for the second quarter of 2019, and 31.8% for the first quarter of 2020. The higher effective tax rate for the first quarter of 2020 was primarily due to an increase in tax expense for forfeited stock options and merger-related stock options. The effective tax rate for the first quarter of 2020 would have been 26.8% without these items. Income tax expense for the six months ended June 30, 2020 was $5.1 million, compared to $9.1 million for the six months ended June 30, 2019. The effective tax rate for the six months ended June 30, 2020 was 29.2%, compared to 28.0% for the six months ended June 30, 2019.

The difference in the effective tax rate for the periods reported compared to the combined Federal and state statutory tax rate of 29.6% is primarily the result of the Company’s investment in life insurance policies whose earnings are not subject to taxes, tax credits related to investments in low income housing limited partnerships (net of low income housing investment losses), and tax-exempt interest income earned on municipal bonds.

Balance Sheet Review, Capital Management and Credit Quality:

Total assets increased 48% to $4.61 billion at June 30, 2020, compared to $3.11 billion at June 30, 2019, primarily due to the Presidio merger and the addition of PPP loans. Total assets increased 13% from $4.08 billion at March 31, 2020, primarily due to the addition of PPP loans and the related deposits.

Securities available-for-sale, at fair value, totaled $323.6 million at June 30, 2020, compared to $383.2 million at June 30, 2019, and $373.6 million at March 31, 2020. At June 30, 2020, the Company’s securities available-for-sale portfolio was comprised of $232.4 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), and $91.2 million of U.S. Treasury securities. The pre-tax unrealized gain on securities available-for-sale at June 30, 2020 was $8.7 million, compared to a pre-tax unrealized gain on securities available-for-sale of $915,000 at June 30, 2019, and a pre-tax unrealized gain on securities available-for-sale of $9.4 million at March 31, 2020. All other factors remaining the same, when market interest rates are rising, the Company will experience a lower unrealized gain (or a higher unrealized loss) on the securities portfolio.

During the second quarter of 2020, the Company sold $29.9 million of US Treasury securities available-for-sale, at a gain of $159,000.

At June 30, 2020, securities held-to-maturity, at amortized cost, totaled $322.7 million, compared to $351.4 million at June 30, 2019, and $348.0 million at March 31, 2020. At June 30, 2020, the Company’s securities held-to-maturity portfolio was comprised of $249.1 million of agency mortgage-backed securities, and $73.6 million of tax-exempt municipal bonds.

During the second quarter of 2020, $7.0 million of municipal bonds held-to-maturity were called, with a gain on sale of securities of $11,000.

As of the current expected credit losses (“CECL”) methodology implementation date of January 1, 2020, there was a $58,000 allowance for losses recorded on the Company’s held-to-maturity municipal investment securities portfolio. For the six months ended June 30, 2020, there was a reduction of $3,000 to the allowance for losses on the Company’s held-to-maturity municipal investment securities portfolio, for an allowance for losses of $55,000 at June 30, 2020.

7


The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:

LOANS

June 30, 2020

March 31, 2020

June 30, 2019

(in $000’s, unaudited)

    

Balance

    

% to Total

    

Balance

    

% to Total

    

Balance

    

% to Total

    

Commercial

$

553,843

21

%    

$

696,168

27

%    

$

545,092

29

%    

SBA Payroll Protection Program Loans

324,550

12

%    

0

%    

0

%    

Real estate:

 

 

 

CRE - owner occupied

 

553,463

21

%    

 

539,465

21

%    

 

421,970

23

%    

CRE - non-owner occupied

725,776

27

%    

748,245

29

%    

517,604

28

%    

Land and construction

 

138,284

5

%    

 

153,321

6

%    

 

97,753

5

%    

Home equity

 

112,679

4

%    

 

117,544

5

%    

 

95,886

5

%    

Multifamily

169,637

6

%    

170,292

7

%    

82,293

4

%    

Residential mortgages

95,033

3

%    

95,808

4

%    

97,530

5

%    

Consumer and other

 

22,759

1

%    

 

33,326

1

%    

 

19,863

1

%    

Total Loans

 

2,696,024

 

100

%    

 

2,554,169

 

100

%    

 

1,877,991

 

100

%    

Deferred loan costs (fees), net

 

(9,635)

 

 

(258)

 

 

(224)

 

Loans, net of deferred costs and fees 

$

2,686,389

 

100

%    

$

2,553,911

 

100

%    

$

1,877,767

 

100

%    

Loans, excluding loans held-for-sale, increased $808.6 million or 43%, to $2.69 billion at June 30, 2020, compared to $1.88 billion at June 30, 2019, and increased $132.5 million or 5%, to $2.69 billion at June 30, 2020, compared to $2.55 billion at March 31, 2020. Total loans at June 30, 2020 included $324.6 million of PPP loans.

Commercial and Industrial (“C&I”) line usage was 27% at June 30, 2020, compared to 40% at June 30, 2019, and 36% at March 31, 2020.

At June 30, 2020, 43% of the CRE loan portfolio was secured by owner-occupied real estate.

The following table summarizes the allowance for credit losses on loans(1) for the periods indicated:

For the Quarter Ended

 

For the Six Months Ended

 

ALLOWANCE FOR CREDIT LOSSES ON LOANS(1)

    

June 30, 

    

March 31, 

    

June 30, 

 

June 30, 

    

June 30, 

 

(in $000’s, unaudited)

2020

2020

2019

 

2020

2019

 

Balance at beginning of period

$

44,703

$

23,285

$

27,318

$

23,285

$

27,848

Charge-offs during the period

(465)

(673)

(76)

(1,138)

(302)

Recoveries during the period

92

251

129

343

886

Net recoveries (charge-offs) during the period

(373)

(422)

53

(795)

584

Impact of adopting Topic 326

8,570

8,570

Provision for credit losses on loans during the period(2)

 

1,114

 

13,270

 

(740)

 

14,384

 

(1,801)

Balance at end of period

$

45,444

$

44,703

$

26,631

$

45,444

$

26,631

Total loans, net of deferred fees

$

2,686,389

$

2,553,911

$

1,877,767

$

2,686,389

$

1,877,767

Total nonperforming loans

$

9,125

$

12,088

$

17,018

$

9,125

$

17,018

Allowance for credit losses on loans to total loans(1)

 

1.69

%  

 

1.75

%  

 

1.42

%

 

1.69

%  

 

1.42

%

Allowance for credit losses on loans to total nonperforming loans(1)

498.02

%  

369.81

%  

 

156.49

%

498.02

%  

156.49

%  

(1)ACLL at June 30, 2020 and March 31, 2020, Allowance for loan losses ("ALLL") at June 30, 2019

(2)Provision for credit losses on loans for the quarters ended June 30, 2020 and March 31, 2020, and the six months ended June 30, 2020,

Provision (credit) for loan losses for the quarter and six months ended June 30, 2019

The ACLL was 1.69% of total loans at June 30, 2020 and the ACLL to total nonperforming loans was 498.02% at June 30, 2020. The ALLL was 1.42% of total loans and the ALLL to nonperforming loans was 156.49% at June 30, 2019. The ACLL was 1.75% of total loans at March 31, 2020 and the ACLL to total nonperforming loans was 369.81% at March 31, 2020. The six basis points linked-quarter decline of the ACLL to total loans was largely due to the 5% increase in total loans for the second quarter of 2020, which primarily resulted from new PPP loans which are government supported.

8


The following table shows the results of adopting CECL for the first six months of 2020:

DRIVERS OF CHANGE IN ACLL UNDER CECL

    

(in $000’s, unaudited)

ALLL at December 31, 2019

$

23,285

Day 1 adjustment impact of adopting Topic 326

8,570

ACLL at January 1, 2020

31,855

Net (charge-offs) during the first quarter of 2020

(422)

Portfolio changes during the first quarter of 2020

1,216

Economic factors during the first quarter of 2020

 

12,054

ACLL at March 31, 2020

44,703

Net (charge-offs) during the second quarter of 2020

(373)

Portfolio changes during the second quarter of 2020

(4,282)

Qualitative and quantitative changes during the second

quarter of 2020 including changes in economic forecasts

 

5,396

ACLL at June 30, 2020

$

45,444

Net charge-offs totaled $373,000 for the second quarter of 2020, compared to net recoveries of $53,000 for the second quarter of 2019, and net charge-offs of $422,000 for the first quarter of 2020.

The following is a breakout of NPAs at the periods indicated:

End of Period:

 

NONPERFORMING ASSETS

June 30, 2020

March 31, 2020

June 30, 2019

 

(in $000’s, unaudited)

    

Balance

    

% of Total

    

Balance

    

% of Total

    

Balance

    

% of Total

 

CRE loans

$

3,394

37

%  

$

7,346

61

%  

$

8,442

49

%

Commercial loans

3,244

36

%  

3,403

28

%  

6,583

39

%

SBA loans

 

921

10

%  

 

771

6

%  

 

513

3

%

Home equity and consumer loans

 

898

10

%  

 

126

1

%  

 

157

1

%

Restructured and loans over 90 days past due and still accruing

 

668

7

%  

 

442

4

%  

 

1,323

8

%

Total nonperforming assets

$

9,125

 

100

%  

$

12,088

 

100

%  

$

17,018

 

100

%

NPAs totaled $9.1 million, or 0.20% of total assets, at June 30, 2020, compared to $17.0 million, or 0.55% of total assets, at June 30, 2019, and $12.1 million, or 0.30% of total assets, at March 31, 2020.

There were no foreclosed assets on the balance sheet at June 30, 2020, June 30, 2019, or March 31, 2020.

Classified assets increased to $31.5 million, or 0.68% of total assets, at June 30, 2020, compared to $31.2 million, or 1.00% of total assets, at June 30, 2019, and decreased from $39.6 million, or 0.97% of total assets, at March 31, 2020. Deferrals included in classified assets totaled $5.6 million at June 30, 2020. These reclassifications are in keeping with internal credit policy as well as long-standing policy of the Office of the Comptroller of the Currency. The increase in classified assets for the second quarter of 2020, compared to the second quarter of 2019 was due to two CRE secured and one commercial lending relationships that were moved to classified assets during the first quarter of 2020. At July 15, 2020, 16 initially deferred loans with $5.3 million in outstanding balances have resumed making regularly scheduled monthly payments but remain classified by the Bank as “Special Mention”.

The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:

DEPOSITS

June 30, 2020

March 31, 2020

June 30, 2019

 

(in $000’s, unaudited)

    

Balance

    

% to Total

  

Balance

    

% to Total

  

Balance

    

% to Total

 

Demand, noninterest-bearing

$

1,714,058

 

44

%  

$

1,444,534

 

42

%  

$

994,082

 

38

%

Demand, interest-bearing

 

934,780

 

24

%  

 

810,425

 

24

%  

 

682,114

 

26

%

Savings and money market

 

1,091,740

 

28

%  

 

949,076

 

28

%  

 

788,832

 

30

%

Time deposits — under $250

 

49,493

 

1

%  

 

51,009

 

2

%  

 

53,351

 

2

%

Time deposits — $250 and over

 

93,822

 

2

%  

 

96,540

 

3

%  

 

88,519

 

3

%

CDARS — interest-bearing demand,

money market and time deposits

 

16,333

 

1

%  

 

15,055

 

1

%  

 

15,575

 

1

%  

Total deposits

$

3,900,226

 

100

%  

$

3,366,639

 

100

%  

$

2,622,473

 

100

%

Total deposits increased $1.3 billion, or 49%, to $3.90 billion at June 30, 2020, compared to $2.62 billion at June 30, 2019, which included $787.7 million in deposits from Presidio, at fair value, and an increase of $490.0 million in the Company’s legacy deposits. Total deposits increased $533.6 million or 16% from $3.37 billion at March 31, 2020. The large increase in

9


the Company’s legacy deposits in the second quarter of 2020 was primarily tied to deposits by customers who had taken out PPP loans.

Deposits, excluding all time deposits and CDARS deposits, increased $1.3 billion, or 52%, to $3.74 billion at June 30, 2020, compared to $2.47 billion at June 30, 2019, which included $772.4 million in deposits from Presidio, at fair value, and an increase of $503.2 million in the Company’s legacy deposits. Deposits, excluding all time deposits and CDARS deposits increased $536.5 million or 17%, compared to $3.20 billion at March 31, 2020.

The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded the regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at June 30, 2020, as reflected in the following table:

    

    

    

    

    

Well-capitalized

Financial

Institution

Basel III

Heritage

Heritage

Basel III PCA

Minimum

Commerce

Bank of

Regulatory

Regulatory

CAPITAL RATIOS (unaudited)

Corp

Commerce

Guidelines

Requirement (1)

Total Risk-Based

 

15.9

%  

15.1

%  

10.0

%  

10.5

%

Tier 1 Risk-Based

 

13.3

%  

13.9

%  

8.0

%  

8.5

%

Common Equity Tier 1 Risk-Based

 

13.3

%  

13.9

%  

6.5

%  

7.0

%

Leverage

 

9.4

%  

9.8

%  

5.0

%  

4.0

%


(1)Basel III minimum regulatory requirements for both the Company and the Bank include a 2.5% capital conservation buffer, except the leverage ratio.

The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated:

ACCUMULATED OTHER COMPREHENSIVE LOSS

June 30, 

March 31,

June 30, 

(in $000’s, unaudited)

    

2020

2020

2019

Unrealized gain on securities available-for-sale

$

5,767

$

6,299

$

675

Remaining unamortized unrealized gain on securities

 

 

 

 

 

 

available-for-sale transferred to held-to-maturity

 

279

 

288

 

316

Split dollar insurance contracts liability

 

(4,865)

 

(4,850)

 

(3,770)

Supplemental executive retirement plan liability

 

(6,706)

 

(6,774)

 

(3,931)

Unrealized gain on interest-only strip from SBA loans

 

345

 

328

 

408

Total accumulated other comprehensive loss

$

(5,180)

$

(4,709)

$

(6,302)

Tangible equity was $388.6 million at June 30, 2020, compared to $293.5 million at June 30, 2019, and $384.5 million at March 31, 2020. Tangible book value per share was $6.49 at June 30, 2020, compared to $6.75 at June 30, 2019, and $6.46 at March 31, 2020.

Heritage Commerce Corp, a bank holding company established in October 1997, is the parent company of Heritage Bank of Commerce, established in 1994 and headquartered in San Jose, CA with full-service branches in Danville, Fremont, Gilroy, Hollister, Livermore, Los Altos, Los Gatos, Morgan Hill, Palo Alto, Pleasanton, Redwood City, San Francisco, San Jose, San Mateo, San Rafael, Sunnyvale, and Walnut Creek. Heritage Bank of Commerce is an SBA Preferred Lender. Bay View Funding, a subsidiary of Heritage Bank of Commerce, is based in San Jose, CA and provides business-essential working capital factoring financing to various industries throughout the United States. For more information, please visit.

Forward-Looking Statement Disclaimer

These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and the following: (1) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (2) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board; (3) our ability to anticipate interest rate changes and manage interest rate risk; (4) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources;

10


(5) volatility in credit and equity markets and its effect on the global economy; (6) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (7) our ability to achieve loan growth and attract deposits; (8) risks associated with concentrations in real estate related loans; (9) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related asset and market prices; (10) other than temporary impairment charges to our securities portfolio; (11) changes in the level of nonperforming assets and charge offs and other credit quality measures, and their impact on the adequacy of the Company’s allowance for credit losses and the Company’s provision for credit losses; (12) increased capital requirements for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (13) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (14) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (15) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (16) our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (17) possible adjustment of the valuation of our deferred tax assets; (18) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (19) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (20) risks of loss of funding of Small Business Administration or SBA loan programs, or changes in those programs; (21) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities , accounting and tax matters; (22) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (23) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (24) costs and effects of legal and regulatory developments, including resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (25) availability of and competition for acquisition opportunities; (26) risks resulting from domestic terrorism; (27) risks of natural disasters (including earthquakes) and other events beyond our control; (28) the expected cost savings, synergies and other financial benefits from the Presidio Bank merger might not be realized within the expected time frames or at all; (29) the rapidly changing uncertainties related to the Coronavirus pandemic including, but not limited to, the potential adverse effect of the pandemic on the economy, our employees and customers, and our financial performance; (30) the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria; and (31) our success in managing the risks involved in the foregoing factors.

Member FDIC

For additional information, contact:

Debbie Reuter

EVP, Corporate Secretary

Direct: (408) 494-4542

Debbie.Reuter@herbank.com

11


For the Quarter Ended:

Percent Change From:

 

For the Six Months Ended:

CONSOLIDATED INCOME STATEMENTS

    

June 30, 

    

March 31,

    

June 30, 

    

March 31,

    

June 30, 

 

    

June 30, 

    

June 30, 

    

Percent

 

(in $000’s, unaudited)

2020

2020

2019

2020

2019

 

2020

2019

Change

 

Interest income

$

37,132

$

40,942

$

33,489

 

(9)

%  

11

%

$

78,074

$

66,938

17

%

Interest expense

 

2,192

 

2,362

 

2,573

 

(7)

%  

(15)

%

 

4,554

 

4,980

(9)

%

Net interest income before provision

for credit losses on loans(1)

 

34,940

 

38,580

 

30,916

 

(9)

%  

13

%

 

73,520

 

61,958

19

%

Provision (credit) for credit losses on loans(1)

 

1,114

 

13,270

 

(740)

 

(92)

%  

251

%

 

14,384

 

(1,801)

899

%

Net interest income after provision

for credit losses on loans(1)

 

33,826

 

25,310

 

31,656

 

34

%  

7

%

 

59,136

 

63,759

(7)

%

Noninterest income:

 

 

 

 

  

 

  

 

  

 

  

  

Service charges and fees on deposit accounts

 

650

 

969

 

1,177

 

(33)

%  

(45)

%

 

1,619

 

2,338

(31)

%

Increase in cash surrender value of

life insurance

 

458

 

458

 

333

 

0

%  

38

%

 

916

 

663

38

%

Servicing income

 

205

 

183

 

150

 

12

%  

37

%

 

388

 

341

14

%

Gain (loss) on sales of securities

 

170

 

100

 

548

 

70

%  

(69)

%

 

270

 

548

(51)

%

Gain on the disposition of foreclosed assets

791

(100)

%  

N/A

791

N/A

Gain on sales of SBA loans

 

 

67

 

36

 

(100)

%  

(100)

%

 

67

 

175

(62)

%

Other

 

595

 

625

 

521

 

(5)

%  

14

%

 

1,220

 

1,168

4

%

Total noninterest income

 

2,078

 

3,193

 

2,765

 

(35)

%  

(25)

%

 

5,271

 

5,233

1

%

Noninterest expense:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

  

Salaries and employee benefits

 

12,300

 

14,203

 

10,698

 

(13)

%  

15

%

 

26,503

 

21,468

23

%

Occupancy and equipment

 

1,766

 

1,772

 

1,578

 

0

%  

12

%

 

3,538

 

3,084

15

%

Professional fees

 

1,155

 

1,435

 

753

 

(20)

%  

53

%

 

2,590

 

1,571

65

%

Other

 

5,791

 

8,364

 

5,416

 

(31)

%  

7

%

 

14,155

 

10,240

38

%

Total noninterest expense

 

21,012

 

25,774

 

18,445

 

(18)

%  

14

%

 

46,786

 

36,363

29

%

Income before income taxes

 

14,892

 

2,729

 

15,976

 

446

%  

(7)

%

 

17,621

 

32,629

(46)

%

Income tax expense

 

4,274

 

868

 

4,623

 

392

%  

(8)

%

 

5,142

 

9,130

(44)

%

Net income

$

10,618

$

1,861

$

11,353

 

471

%  

(6)

%

$

12,479

$

23,499

(47)

%

PER COMMON SHARE DATA

 

 

 

 

  

 

  

 

 

  

  

(unaudited)

 

  

 

  

 

  

 

  

 

  

 

 

  

  

Basic earnings per share

$

0.18

$

0.03

$

0.26

 

500

%  

(31)

%

$

0.21

$

0.54

(61)

%

Diluted earnings per share

$

0.18

$

0.03

$

0.26

 

500

%  

(31)

%

$

0.21

$

0.54

(61)

%

Weighted average shares outstanding - basic

 

59,420,592

 

59,286,927

 

43,202,562

 

0

%  

38

%

 

59,353,759

 

43,155,360

38

%

Weighted average shares outstanding - diluted

 

60,112,423

 

60,194,025

 

43,721,451

 

0

%  

37

%

 

60,152,487

 

43,695,117

38

%

Common shares outstanding at period-end

 

59,856,767

 

59,568,219

 

43,498,406

 

0

%  

38

%

 

59,856,767

 

43,498,406

38

%

Dividend per share

$

0.13

$

0.13

$

0.12

 

0

%  

8

%

$

0.26

$

0.24

8

%

Book value per share

$

9.60

$

9.59

$

8.92

 

0

%  

8

%

$

9.60

$

8.92

8

%

Tangible book value per share

$

6.49

$

6.46

$

6.75

 

0

%  

(4)

%

$

6.49

$

6.75

(4)

%

KEY FINANCIAL RATIOS

 

  

 

  

  

 

  

 

  

 

  

 

  

  

(unaudited)

 

  

 

  

 

  

 

  

 

  

 

  

 

  

  

Annualized return on average equity

 

7.45

%  

 

1.29

%  

 

11.96

%  

478

%  

(38)

%

 

4.36

%  

 

12.61

%  

(65)

%

Annualized return on average tangible equity

 

11.06

%  

 

1.91

%  

 

15.94

%  

479

%  

(31)

%

 

6.45

%  

 

16.89

%  

(62)

%

Annualized return on average assets

 

0.96

%  

 

0.19

%  

 

1.48

%  

405

%  

(35)

%

 

0.59

%  

 

1.53

%  

(61)

%

Annualized return on average tangible assets

 

1.01

%  

 

0.19

%  

 

1.53

%  

432

%  

(34)

%

 

0.62

%  

 

1.58

%  

(61)

%

Net interest margin (fully tax equivalent)

 

3.46

%  

 

4.25

%  

 

4.38

%  

(19)

%  

(21)

%

 

3.83

%  

 

4.38

%  

(13)

%

Efficiency ratio

 

56.76

%  

 

61.70

%  

 

54.76

%  

(8)

%  

4

%

 

59.38

%  

 

54.12

%  

10

%

AVERAGE BALANCES

 

  

 

  

 

  

 

 

  

 

  

 

  

  

(in $000’s, unaudited)

 

  

 

  

 

  

 

  

 

  

 

  

 

  

  

Average assets

$

4,434,238

$